The minimum wage dilemma

German guidelines could be a good reference for Korea’s minimum wage policy.

Aug 02,2017

South Korea is experimenting with a big hike in its minimum wage. From next year, the minimum hourly wage will be lifted by 16.4 percent to 7,530 won ($6.70). After vowing to deliver an hourly minimum wage of 10,000 won by 2020, President Moon Jae-in has made the first big stride toward that goal. The higher minimum wage is a keystone to his economic ambition of achieving more jobs and greater incomes to bolster domestic demand and living standards.

About 17.4 percent of our working population lives on the minimum wage. That proportion is the third highest among the 26 members of the Organization for Economic Cooperation and Development. The relative poverty rate — the share of people living below 50 percent of the median income — has been increasing. Both indicate how polarized wealth in Korea is.

A higher minimum wage can improve incomes and living standards of people in low-paying jobs, narrow the wealth gap and contribute to stimulating consumption. When the hourly pay is raised to 7,530 won, monthly incomes will increase by 220,000 won. When the hourly pay goes up to 10,000 won, monthly incomes would rise 740,000 won.

The effect of the steep rise in the minimum wage on the domestic economy is uncertain. Proponents claim the rise would prevent abusive wage cuts, strengthen the competitiveness of self-employed businesses, and help to ease poverty among retirees who still take jobs. But the sharp rise in the minimum wage could hurt the bottom line of small merchants. Nearly half of self-employed people who pay workers the minimum wage earn less than 300 million won a year. According to 2013 data from the Ministry of SMEs and Startups, the operating profit of the self-employed averaged 1.87 million won a month, and 27 percent clear less than 1 million won a month.

Thus, a heated debate has begun about the ramifications of the spike in the minimum wage on the labor market and employment. Some claim it won’t affect hiring that much. The Korea Federation of SMEs warned that labor costs would reach 15.2 trillion won from the increase in the minimum wage next year and force employers to cut staff or stop hiring. The faster the rise in labor costs, the scarcer jobs will become, it said. The government too is aware of the downside in the hike in the minimum wage. It immediately pledged to dig into the public coffers to subsidize employers with 3 trillion won a year for increases in labor costs.

The government is taking pains so that jobs are not jeopardized by the hike in the minimum wage as that would contradict the president’s promise of increased job opportunities and security. But the state cannot go on subsidizing small businesses for the surge in labor costs. Compensating the self-employed for losses from increased wage costs with public funds increases the burden on taxpayers and the state’s role in a market economy. Kim Sang-jo, chief of the Fair Trade Commission, underscored that fiscal assistance would be a makeshift action to cushion the initial shock.

Moon and his government should moderate the pace in minimum wage increases in order to minimize the side effects. The wage floor should be raised with respect to the affordability for the employers and the reasonable needs of low-income workers.

Germany’s minimum wage law sets three guidelines in revising the wage floor every two years. First, the minimum wage should be enough to cover the minimum living expenses of a worker. Second, the rise must not undermine the viability and competitiveness of small and mediums-sized enterprises. Third, the minimum wage level must not dampen hiring. In short, the wage level must consider living standards for the workers, competitiveness of small and mid-sized businesses, and employment conditions. The German guidelines could be a good reference in guiding our minimum wage policy.

The system must change along with the rises in costs. As the minimum wage act counts only the base salary and monthly fixed allowances, it must reflect bonuses and other welfare compensation as well. According to the Employment and Labor Ministry, the base salary and fixed allowances take up only 67.1 percent of the monthly paycheck of workplaces employing more than 100.

Here’s the dilemma: even if a worker earns a minimum wage of 12,000 won per hour, it violates the act from next year if the worker’s hourly wage is 7,400 won solely based on their base salary and fixed allowances. Therefore, the wage floor must reflect all monthly income so that the rise can bring about real improvements to all low-income workers.